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While lenders can hope to recover more and quickly, borrowers can start afresh

Have you lent large sums of money with no recovery in sight? Or are you caught in a debt tangle, unable to make payments? With the passage of the Insolvency and Bankruptcy Bill, help may be at hand soon.

The main issue with the earlier process in India was that there were multiple laws governing insolvency, delaying the entire resolution process. The many laws led to a lot of confusion on which judicial forums to approach; this was agonising for individuals.

The new bankruptcy code has put these issues to rest. While lenders can hope to recover more and quickly, borrowers wanting to start afresh can also get respite. The new code provides an option for borrowers to initiate the bankruptcy proceedings on their own.

As a creditor

Much like banks and financial institutions, individuals too end up throwing good money after bad. The new bill allows an individual who is not able to recover his/her money to file for insolvency. An individual creditor or group of creditors can hire an insolvency resolution professional to initiate the process through an application filed with the authorities.

The resolution professional will coordinate the application, valuation of assets, and so on. According to Neha Malhotra, Executive Director, Nangia & Co, many firms in India can now start offering such professional services.Individuals can trigger the resolution process with the help of these professionals who can help file the application with the Debt Recovery Tribunal.

Once the application is filed, the DRT then admits the application for an insolvency resolution process. It is important to note here that the new bill does not offer an escape route to individuals who cannot pay up.

Even if the individual is not able to make the full payment, the process ensures that the borrower pays some amount. A repayment plan is drawn, which has to be agreeable to all the creditors.Once the plan is approved and the debtor pays the amount, the case is closed. But what if the insolvency process fails?

This can happen if all the creditors are not on the same page in as far as the resolution is concerned. Inability of the borrower to honour payments under the newly drawn up repayment schedule can also lead to failure of the resolution process.

In cases where the creditors or debtors do not agree to a resolution or the debtor does not honour the repayment schedule, the adjudicating authority can pass an order stating that the debtor/creditor is entitled to apply for bankruptcy. Pursuant to such application, the DRT shall pass the bankruptcy order, followed by a public notice wherein the creditors can come and claim from whatever is available based on the valuation of assets, according to Neha.

As a debtor

But it is not always creditors who want to close the accounts and start afresh. Borrowers too may want to settle their debts and start afresh.

The interesting aspect with the new code is that it allows the debtor/borrower himself to initiate the insolvency resolution process once he has defaulted on a debt.

Here again the application is filed with the authorities — the DRT in this case. The authorities then employ an insolvency resolution professional. It is then decided on how much he can pay and once that is settled, the debtor can go ahead and make the payment and close his debt.

An entrepreneur, who is stuck in the vicious cycle of debt, can thus have a chance to move on and try out new pastures.

If the insolvency resolution process fails, the debtor can file for bankruptcy directly.

A clean slate?

While the idea of a starting on a clean slate may sound alluring, it should only be used as a last resort.

Be sure to use this tool prudently than as a ruse to escape debt obligations. This is because any such resolution can affect your credit score, say rating agencies. This can limit your future borrowing capacity.